Are Lower Swipe Fees Still in the Cards?

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The Dodd-Frank Act’s Durbin Amendment, which calls for the Federal Reserve to cap the interchange or “swipe” fees that financial institutions charge merchants for debit- and credit-card approvals, has provoked no shortage of controversy. Consumer-facing businesses have roundly cheered the measure, citing the $12 billion to $14 billion they would collectively save if it is enforced. “Credit-card processing fees reduce our gross margin, so any reduction is good for our business,” says Eric Sockol, CFO of online jewelry shop Gemvara.

Financial institutions, meanwhile, have been pushing to repeal the law, on the grounds that they need such fees to cover the costs of the complex networks and fraud-prevention measures that support the debit- and credit-card systems. At the close of the Fed’s comment period on the topic last week, the regulator had received some 630 comment letters, along with 2,124 “form” comment letters, according to its Website, many from small banks and credit unions.

The banking industry has also received a boost from regulators, including Fed chairman Ben Bernanke, who have publicly expressed concerns about what the cap — intended only for larger banks — would mean for smaller banks. On March 2, a hearing before a subcommittee of the House Committee on Financial Services will explore that topic further, along with the impact of the legislation on small businesses.

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Absent a congressional decision to delay, repeal, or otherwise modify the law, the Fed is due to issue the rule by April 21 for implementation beginning July 21.

Business owners and bankers alike aired their grievances last week during a heated hearing before the same House subcommittee. “Average debit-card interchange rates have risen 500% over the past 10 years, and without some form of intervention, we see rate increases continuing,” said David Seltzer, vice president and treasurer of 7-Eleven Inc., who also testified on behalf of the Retail Industry Leaders Assn., a group of more than 200 large retailers. The interchange fees are “the largest single cost” outside employee wages and benefits for 7-Eleven franchisees, he said, “and the only cost they have no control over.” The fees are such that it can be cheaper for a store to give away a local paper than to sell one to a customer using a debit card, he added.

Seltzer and other small-business owners predicted great things to come from lower swipe fees, including “more hiring, more development, and more economic activity in communities throughout America.”

Bankers, on the other hand, warned of higher checking-account fees and less lending if the fee caps are implemented. While the amendment exempts smaller banks from the proposed caps, which would range from 7 cents to 12 cents on a transaction, those banks say that competitive pressures would force them to lower their fees to the same level as those of affected banks. Lower fees, in turn, would not cover the costs of the services they provide.

“It is quite clear that the significant cuts in interchange fees envisioned by the Federal Reserve’s proposed rule will lead to a direct harm to consumers, be it in the form of higher costs, lost services, or a smaller banking industry able to serve local needs,” said David W. Kemper, chairman and CEO of Commerce Bank, a Midwestern “super-community” bank, who also spoke on behalf of the American Bankers Assn. and the Consumer Bankers Assn. He said the cap would cut interchange-fee revenues by 70% to 85%, which would “leave our bank in the unfortunate position of losing money, on average, for each account.” It costs his bank $230 per year to maintain a consumer checking account, including debit-card usage and overhead costs, he said, with such accounts yielding an average 13% profit margin, or $35. The fee cap would cut profit to negative $27, said Kemper.

While the long-term effects of the measure are unclear, at least one expert says that any sort of repeal is unlikely. Aaron McPherson, practice leader of IDC Financial Insights, points out that the amendment’s sponsor, Sen. Richard J. Durbin (D-Ill.), is the Senate majority whip and “could block [any opposition] from even reaching the floor.” As for the Fed, it has “limited ability” to soften the regulations, he says, based on the law’s directives. “I’m counseling my clients [mostly financial institutions] to accept this as a done deal,” says McPherson.

However, McPherson points out that the cap may have a more muted impact than is currently projected. He notes that merchants pay several other categories of fees to the banks beyond interchange fees, and those are not affected. So “while the interchange is being cut by 70% on average, businesses may see reductions [of total fees] that are less than that.”